Blubble Time!

If you’re an early stage venture capitalist or angel investor there is no time like the present to declare a bubble, say valuations are out of control and predict the demise of the tech industry in the very near future. Since they’re in the business of buying low and selling high, any angle that suggests that the buy price should be even lower sounds great to them.

and

If there’s any evidence of said bubble all the press will eat it up.

This time it’s the press wringing their hands over the Instagram acquisition by Facebook. Nick Bilton at the NY Times even gets a Stanford business school professor to weigh in:

Professor Pfeffer said that through “the hideous recession” that America has suffered in the last several years, the Valley has applied increasingly incoherent valuations to companies.

“This is 1999 all over again, but this time, it’s gotten worse,” he said, referring to the last technology bubble to burst. “We’re back to companies throwing around funny money. The economic values don’t add up.”

He added: “These companies are simply being founded to be bought. With the exception of a select few, Silicon Valley has spawned no real companies over the past decade. Even now, as the value of eyeballs has gone down, people are buying concepts, not companies.”

I totally agree that whatever is happening right now is exactly like the late 90s, except not really at all. In my post a year ago and in my post next year, I’m sure, I wrote about how different things are. It’s all about public company valuations. P/E ratios in the 90’s were out of control. Today they’re extremely reasonable. From Chris Dixon:

Public tech companies: Anyone with a basic understanding of finance would have trouble arguing many large public tech companies are trading at “bubble valuations” – e.g. Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E). You could certainly debate other public tech stock valuations (there are a number of companies that recently IPOd that many reasonable people think are overvalued), but on a market-cap weighted average the tech sector is trading at a very reasonable 17 P/E.

In 2000 the world was driven by greed. No one bought into the valuations but they didn’t want to be the only guy on their block who didn’t make millions in the stock market. Today valuations are driven largely by profits.

Facebook’s acquisition of Instagram was driven by fear, not greed. It’s no different than when Yahoo tried to buy Facebook for a billion dollars seven years ago.

It’s about taking a competitor out at the knees before they have time to actually be a competitor.

That’s not a bubble. It’s just smart.

So when Bilton says directly “When this next bubble pops — and it will pop” and gets a source to say “This is 1999 all over again, but this time, it’s gotten worse,” I just shake my head.

17 thoughts on “Blubble Time!”

Good one Mike!
When everyone talks about bubble and starts predicting it, it never bursts. Only when fiercest also starts saying that we are living in new age & these are the new benchmarks of valuations…then only the bubble bursts!
Still there is enough liquidity in market to support StartUps. Traction, revenue and lean approaches are still the buzz words.
-Harman

It’s about taking a competitor out at the knees before they have time to actually be a competitor. Very true and if more angels and seed stage investors concentrated on this mentality rather than a homerun, …more than 1 out of 10 deals would bring them nice revenue. I mean buy low, sell medium. Puts more Devs back in the marketplace for startups and keeps prices out of the bubble. Nice work Mike.

… C’mon Mike! Once again, you are wasting your time… quoting/commenting on what Bilton writes or says is the equivalent of having a “conversation” with the village idiot!
[particularly the idiots at the NYT.]
Stanford is a great institution… however, like everywhere else, they also have dunces and yes, village idiots, like the quoted “professor.”
Please, sharpen your mind and give us a “real” IT insight similar to those you wrote at TC…

OK, I agree/get the concept of taking out your competitor. But doesn’t one have to include ‘at what valuation’? Otherwise, what’s stopping you from arguing FB should have paid $2B…$3B…$10B…or $100M (well, they wouldn’t have taken that but..)..etc. Not arguing either way in terms of their decision.., but just stating ‘taking out their competitor’ seems too easy.
Regardless, I think from a business-case standpoint, the FB purchase is fascinating. There’s no right answer right now in terms of whether what they did was 100% right, but it’s fascinating to me the decision was made and I’d *love* to see more folks like Arrington pick it apart. I am actually surprised that I haven’t seen more angels/VC’s review/blog it (ie, reviewing it in detail/critiquing it a bit) but maybe it’s too taboo to review/critique just yet? I don’t know.
Anyway, I enjoy your blog.

I think it’s something more complicated. The climate seems to be changing in SV from long term big “swing for the fences” entrepreneurs to ” let’s get sold for $15m and move on.” I’m not sure Instagram is world-changing, although FB is, and I guess it needs to be protected.

“Facebook’s acquisition of Instagram was driven by fear, not greed. It’s no different than when Yahoo tried to buy Facebook for a billion dollars seven years ago.”
This is the key: When people see large numbers, especially in tech, it means that something must go wrong. But it is critically important to draw a line between greed and fear.
Great post Michael!

How exactly do low/normal/rational P/E ratios for *publicly traded companies* (with established revenuew and earnings) say *anything* about whether or not VCs/angels are tremendously overpaying for start-ups with neither.

yes. the bubble is in the startup market, not in mature companies like google and yahoo. you’re seeing the flipping, you have the expansion of the money supply, you have the accounting fraud. GRPN, ZNGA, and others in bubble 2.0 all are reporting quarterly losses. if you’re looking for ridiculous P/E ratios the FB IPO will be all you need.